Canadian cannabis stocks continue to trail the broader markets by a wide margin. For instance, in the last 12 months, shares of Canopy Growth (TSX:WEED) are down 84%, valuing the company at $572 million by market cap.
The marijuana producer currently trades 99% below all-time highs due to its weak fundamentals, negative profit margins, overvalued acquisitions, goodwill write-downs, and high inventory levels. Let’s see if Canopy Growth stock can stage a comeback this year.
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The cannabis industry in Canada is broken
Several marijuana producers in Canada are reporting consistent losses due to a variety of industry-wide headwinds.
Canada legalized marijuana for recreational use in October 2018, attracting a large number of players. To gain market share, Canopy Growth and its peers invested heavily to acquire small players and expand their manufacturing capabilities.
However, marijuana is a heavily regulated industry, which resulted in the slow rollout of retail stores in major Canadian provinces and an oversupply of products.
Due to the regulations associated with this sector, cannabis producers are unable to market their products via traditional strategies. Additionally, these products are sold in government-approved packages, eroding profit margins in the process.
Moreover, licensed producers such as Canopy Growth had to compete with cannibalization from the illegal market, all of which led to frequent losses.
According to a report from the BBC, while marijuana sales added $43.5 billion to Canada’s gross domestic product in 2022, cumulative losses for cannabis producers are much higher at $131 billion.
Canopy Growth needs to raise cash
Alcohol giant Constellation Brands invested roughly US$4 billion in Canopy Growth for a sizeable stake back in 2018. The investment provided Canopy Growth with the resources to enter new markets, acquire customers, and expand its manufacturing over time.
However, a slew of poor acquisitions and unattractive profit margins meant Canopy Growth ended the September quarter with just $201 million in cash.
The company was forced to raise capital to avoid going bankrupt and recently announced a private placement for US$30 million. It ended the fiscal second quarter (Q2) of 2024 (ended in March), with $765 million in debt and needs to further improve liquidity to remain operational.
Canopy Growth emphasized it would use the proceeds of the offering to strengthen its financial position and lower balance sheet debt. The Canadian marijuana heavyweight also divested a skincare and wellness brand called This Works for $15.9 million.
Canopy Growth stock is a high-risk investment
In Q2, Canopy Growth claimed it reported its third consecutive quarter of organic revenue growth while significantly reducing costs. However, its gross margins in Q2 were just 34%, while its net losses stood at $148.2 million with a free cash outflow of $67 million.
In the last two years, Canopy Growth used $173 million to fund its operations. In the year-ago period, this number was much higher at $222 million.
Analysts tracking Canopy Growth stock expect the company to narrow its losses from $4.18 per share in fiscal 2024 to $1.28 per share in fiscal 2025. Despite its efforts to cut costs significantly, the company is nowhere near profitability.
In summary, Canopy Growth is a loss-making company that does not have an attractive risk/reward profile. There are several other companies with much better financials positioned to deliver steady gains for long-term investors.
